Outcome-based funding is a ready-made solution as the future of USAID and global development funding more broadly hangs in the balance.

By Celeste Brubaker. Courtney Roberts. Roger Sandberg. Greg Spencer

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This article originally appeared in Devex. 

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The recent freezing of U.S. foreign aid and the dismantling of USAID represents the latest and most dramatic wave in a global trend of reduced government assistance. This shift is significant, but it also follows a thread of previous actions to reduce international development funding, which includes substantial cuts by other major contributors to foreign assistance, including the United Kingdom, Germany, Canada, and the Netherlands.

With USAID, the largest bilateral provider of development and humanitarian assistance, now shut down, the sector is entering a potential funding crisis. Social enterprises and NGOs may no longer be able to rely on traditional funding streams and are facing the reality of a world where 40% of international development spending may not be restored.

This crisis also creates an opportunity: To rethink the approach to financial sustainability, strategic value, and funding structures while other funding sources envision a more efficient and effective world in which the U.S. plays a lesser role. 

So how can both NGOs and funders of humanitarian and development assistance move forward?  

Amid this funding crisis, a shift toward greater efficiency and measurable results is increasingly seen as a way to still attract capital and sustain impact. The increased adoption of an outcome-based funding, or OBF, strategy in development funding could ensure more funding is linked directly to measurable results, not just by governments and publicly backed development finance institutions but by philanthropists and corporate funders. Collectively, this could make more impact from more limited pools of funding.

A framework for rolling out OBF across development spending

Outcome-based funding is a mechanism that involves funding commitments based on a predetermined and agreed upon set of validated results. 

OBF isn't new, and a recent report by the World Economic Forum estimates there is currently a $185 billion market. What’s changed is the emergence of new tools and technology that make it easier to measure and report on the impact and effectiveness of programs. The next phase in this critical development will be to consolidate and standardize the metrics, outcomes, and methodologies for measuring, valuing, verifying, and eventually funding outcomes through digital marketplaces for the development sector.  

The carbon markets, which are a form of OBF, have now largely achieved this through standardization, a streamlined framework and supporting methodologies, and support from international bodies such as the United Nations Framework Convention on Climate Change. Gold Standard, a climate and sustainability impact standard, for example, has issued 371 million metric tons of emissions reduction credits from 3,464 projects in more than 100 countries. 

There is an opportunity to do the same in the development sector for OBF. We need to start by galvanizing the myriad players together. There are already efforts to do this by organizations like the World Economic Forum, which recently launched an OBF initiative at its summit in Davos, Switzerland, in January. The aim is to bring innovators together with social impact investors to transform OBF into tradable impact that can be exchanged to advance sustainable development and corporate sustainability.

Leverage scalable platforms and marketplaces

OBF approaches have historically been criticized for their long lead time for development and structuring, along with the significant costs of designing, managing, and executing them. Another criticism of traditional development funding is that a few “prime” contractors receive a vast majority of the contracts due to their familiarity with the USAID application, administration, and reporting requirements. Much the same way that standardization and democratization have streamlined carbon markets, platforms, and marketplaces that leverage technology and automation while facilitating connection between decision-makers and high-impact organizations are critical. 

Modern technology means this is easier than ever before. Today, the standardization of frameworks, methodologies and audit processes can be implemented through online marketplaces that allow multiple payers to fund outcomes from a project, resulting in a dramatic reduction in transaction costs and increased efficiency.   

Build on successful case studies 

We have a substantial and growing set of examples to build from, including 34 impact bonds in low- and middle-income countries. USAID has funded at least four development impact bonds, or DIB, in sub-Saharan Africa and across Asia. 

There are also clear pathways for integrating OBF funding into government programming at home. In 2018, the first Trump administration passed the Social Impact Partnerships to Pay for Results Act, or SIPPRA, and $100 million was appropriated for domestic OBF projects. That program is still ongoing. In December, nearly $47 million in new awards were announced. 

The results from a DIB in Kenya and Uganda show meaningful reduction in poverty and another in Cambodia shows improved health and sanitation outcomes. International and domestic development funders can leverage and improve upon these case studies to scale up OBF programs in a way that effectively and efficiently drives funding to results. 

Making outcomes-based funding open source 

Currently, too few organizations have the skills and experience to effectively deliver OBF projects, creating a risk that funding could end up being restricted to a small number of specialists.

To mitigate this, the sector needs open-source capacity-building resources for small and medium-sized organizations, along with open calls for OBF programs with simple administrative and reporting structures focused primarily on funding verified outcomes.

Impact verification of the outcomes achieved is more meaningful than compliance-focused reporting to “tick boxes.”

Standardizing methods and verification processes will reduce complexity and make it easier for philanthropists, corporations, and supporting organizations to access and fund organizations delivering outcomes for hundreds of thousands of people. 

Scaling outcome-based funding for global impact

We are at a critical moment in the future of not just U.S. but international development spending. It is vital for the lives of people around the world who depend on foreign aid that much of the funding is quickly restored. If the U.S. government or other development funders want to make available funding go further and be confident of its impact, then outcome-based funding offers a ready-made solution. 

By following an outcome-based funding approach, policymakers can have greater confidence that aid spending is delivering what it is supposed to, while also creating a compelling offer to other sources of social impact funding, from corporates to philanthropists. 

The opportunity for expanding outcome-based funding models across both domestic and international development is significant and urgent. But doing so requires the development of open-source tools and training to democratize access, standardization of impact methodologies to ensure transparency and scalability, and utilization of low-cost OBF-ready platforms that can deliver at scale. If policymakers, investors, and NGOs collaborate now, we can turn this crisis into a moment of transformation.

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